Capital market reform crucial for ensuring steady growth

For example, Europe is wrestling with an excessive reliance on the banking sector. About 75 percent of all corporate financing in Europe is provided by banks, compared with 30 percent in the US. Europe has therefore had to begin a difficult debate on capital market union.

China has already made progress on this front. Over the past 15 years, the proportion of formal bank lending in the total credit system has declined from 90 percent to about 70 percent.

Nonetheless, the rapid rise of the shadow banking system－which may help improve the efficiency of credit allocation in the long run－needs to be reined in. This will allow regulatory checks and balances to be applied and risk management systems to be established or enhanced.

It is clear that having an efficient debt capital market is very important. Domestic bond issuance reached the equivalent of $2 trillion last year, up 41 percent from 2013. Municipal bond issuance is increasing and bond-for-debt swaps will develop.

At the same time, China's international bond market is buoyant, with issues last year reaching the equivalent of $139 billion, more than half of the total in Asia.

In the past 20 years, the capitalization of the A-share market in the Chinese mainland has increased more than 200 times to $6 trillion, making it the world's second-largest equity market.

Derivatives markets will also be crucially important. The development of the futures market will play a vital role in hedging and risk management, ultimately creating a more efficient, less risky economy.

If capital markets are the bridge between sources and users of capital, China will need more bridges and more traffic across them. With $15 trillion in bank deposits, growing at $2 trillion a year, the nation can recycle savings into productive assets.

Financial reform is crucial to the healthy development of the economy in the longer term. Indeed, financial sector reform is a key component of China's economic reform blueprint, as unveiled at the Third Plenum in November 2013, and it will give the market a more decisive role in allocating resources.

There will undoubtedly be bumps in the road to reform. But in the case of China, if the reform agenda is completed in full, the road ahead will be smooth and 10 years from now, China is likely to be the world's leading economy. It will also be one that enjoys more sustainable and better-balanced growth.

The author spoke recently at the China Development Forum about capital market reforms.